Competitiveness is currently centre stage, with a debate raging over whether the UK could soon overtake Germany to become the largest economy in Europe. However, a closer look reveals that, if we do close the gap, it would be more to do with German demographic decline and euro weakness than UK productivity strength.
Competitiveness is also centre stage for the wrong reasons, with a debate over the UK’s “productivity puzzle” and weak performance over recent years. The election focus on real income growth is coupled with productivity too, as pay and performance are linked.
The UK’s recent productivity performance has been poor. But international comparisons by the ONS also show that the UK is not the only economy where productivity growth (on the per hour worked measure) has been weak. Growth in output per hour worked has been as weak in Germany as in the UK. Only in the US can productivity be said to have bounced back post-crisis.
Our relative productivity performance is also poor when one compares levels. GDP per worker per hour worked is 31 per cent higher in the US, 28 per cent higher in Germany and 27 per cent higher in France. The story looks a little better on the simple GDP per worker measure. The gap narrows against Germany (to 6 per cent) and France (to 13 per cent) because we work longer hours. Unfortunately, it widens against the US to a whopping 40 per cent.
Survey-based measures of competitiveness, such as the World Economic Forum’s indices, show little change in the UK’s ranking over the past decade. The 2014-15 rankings place the UK in ninth place (out of 144), up from tenth the previous year. Back in 2006-07, the UK was in tenth place also.
So we’re left in a muddle. Aside from the US, relative GDP per worker isn’t too bad, and we’d rather have the UK’s productivity and employment growth than France’s productivity and unemployment. We don’t perform too badly in survey-based comparisons either, but the message is mediocrity. Or is it?
The ultimate aim of all economic activity is consumption. While investment can enhance growth and the standard of living over time, our ultimate aim is to enjoy consumption. So a country might have a very high investment to GDP ratio, high per capita GDP and be judged to be highly competitive, but the people living there might not feel so affluent because their per capita consumption might be less good. In this sense, consumption is the core measure of competitiveness as it captures our ultimate economic purpose, in terms of what we want to expand over the long term.
There are two relevant measures here, as defined by the OECD. The first is per capita final household consumption. Household final consumption expenditure covers all purchases made by resident households (home or abroad) to meet their everyday needs: food, clothing, housing services (rents), energy, transport, durable goods (notably cars), and spending on health, leisure and miscellaneous services. Partial payments for goods and services provided by general government are included in household final consumption. This covers cases in which households have to pay for a part of the public services provided, like prescription medicines.
The second is per capita actual individual consumption. Households’ actual individual consumption is equal to households’ consumption expenditure plus those general government expenditures that directly benefit households, such as healthcare and education.
OECD estimates of per capita final consumption and actual individual consumption show the only large economy ahead of the UK is the US. The only other economies ahead of us are Switzerland (on the household final consumption measure) and Luxembourg. So the US and the UK can say they lead the world. But what matters is the sustainable level of per capita consumption, and therein lies the uncertainty. For in the absence of a competitive supply-side, a country may only be able to sustain such consumption levels through an unsustainable borrowing binge.